Public Finances

Public Financial Management (PFM) is an interdisciplinary system used as a basis for the management of a nation’s wealth and, it underlies all government activities. It draws from economics, political science, and public administration, as well as accounting and auditing. In its most traditional sense, it is concerned with the control of funds (i.e. the budget in its established phases – formulation, approval, and execution) in line with financial regulations.

Because of the persistent challenges of managing public finances, innovative ideas and reforms were introduced, starting in Australia, New Zealand, and United Kingdom from the 1980’s and coinciding with the shift to the New Public Management paradigm. Some of the reforms and new ideas introduced since then are related to fiscal rules and fiscal responsibility laws, medium-term expenditure frameworks, performance budgeting, risk management techniques, etc…

This evolution has expanded the coverage of PFM from the strict control of the budgetary process to all aspects of managing public resources, including resource mobilisation and debt management. The following figure provides a typical example of how PFM relates to the organisation of the public sector. It shows governments as a complex social process with a mixture of formal and informal structures and influences. PFM has a key role in this broader environment.

Figure 1. Overview of the PFM context

Fig1-1

Source: CeFiMs (2012)

PFM is not just a tool used by entities to report on their historic performance; it is a system consisting of a number of sub-systems and processes to be followed in order to improve the quality of public service outcomes. The following figure provides in greater detail the different components of the system.

 

Figure 2. PFM system componentsFigure 2

Source: CeFiMs (2012)

This model shows that the PFM system is established by law or regulation and is composed of a series of more or less integrated processes and procedures used for:

  1. Resource management
  • Fiscal management: Usage of information and tools to facilitate national
    economic management of balances, flows and risks (i.e.
    level and cost of debt; levels and impact of taxation
    and non-tax revenues; fiscal risk management to
    ensure full employment and stable prices.
  • Resource allocation: Usage of information and tools to enable resources to
    be allocated through the budget process so as to best
    achieve government policies and priorities, the
    provision of public goods and to foster equity.
  • Efficient and Usage of information and tools to enable government
    effective operations:  to carry out its operations as effectively and efficiently
    as possible (e.g. minimising transaction costs, etc…).
  1. Use of public resources
  • Transparency: Make information available to stakeholders (including
    the general public) in a format and time that facilitates
    transparency in government operations.
  • Accountability: Make information available in a format and time that
    enables government officials to be made accountable
    for their action. Appropriate explanations are made for
    any significant deviations from the agreed budget.
  • Stewardship and Manage resources in compliance with all relevant laws,
    regulatory compliance: regulations and standards; fulfil considerations of
    ethics and propriety.
  1. Fiduciary risk management
  • Financial control Put in place financial procedures and information that
    framework: manages fiduciary risk at acceptable levels.
    This includes all aspects of the financial control
    framework (e.g. internal audit, internal control and
    measures to minimise opportunities for fraud and
    corruption).
  • Approach to capacity Capacity building for:
    building and human    Government and public sector employees; the wider
    rights: economy; stakeholders; compliance with global
    compact and poverty eradication.
  • Oversight: Public oversight mechanisms, especially by an
    independent audit and legislative review process. Allow
    timely review of financial resource use and regulatory
    compliance by parliament and other stakeholders.

Furthermore, it shows the importance an effective PFM has for good decision making because it affects how funding is used to address national and local priorities, the availability of resources for investment and the cost-effectiveness of public services. It also impacts on the trust the general public has for the public sector organisations depending on the degree of financial stewardship, accountability and transparency in the use of public funds. It is thus essential for all governments to achieve the objectives of PFM.

The Horn of Africa faces common challenges with the rest of the continent in achieving these objectives. During decades, most of the countries concerned have experienced lack of human capacity, low credibility of their enacted budgets, poor links between their policy priorities and what public resources actually fund, a high cost of wastage and corruption, unmanageable debt burden and, unplanned and unpredictable aid flows. The result has been the deterioration and even collapse of public services and infrastructure. In a country like Somalia, this has contributed to the failure of the state itself.

Having said this, the region, owing to the process of democratisation, has made constant progress in building satisfactory systems to deliver good PFM. The countries in the Horn are also signatories of the Declaration on Good Public Financial Governance adopted in 2011 in Addis Ababa during the Joint Annual Meeting of the Conference of Ministers of Economy and Finance and ECA Conference of African Ministers of Finance, Planning and Economic Development. This declaration commits each country to:

  • Improve fiscal transparency;
  • Deepen the support for the constitutional accountability institutions such as the Supreme Audit Institutions, The legislature and, others concerned;
  • Formalise tax and budgetary practices;
  • Build effective and efficient PFM operating institutions;
  • Enhance revenue mobilisation capacity;
  • Improve technical capacity in budget preparation, execution and reporting;
  • Effectively managing Aid for development;
  • Strengthen the management of public debt and financial assets.

As you can understand, this page is dedicated to the subject of Public Financial Management in the context of the countries in the Horn of Africa. I will be posting academic articles examining the practical situation in each country and recommending where possible specific improvements in line with the Declaration on Good Public Financial Governance.

  • Macroeconomic planning and long term fiscal projections;
  • Revenue mobilisation;
  • Budget preparation and MTEF;
  • Budget execution and monitoring, including accounting, payments, procurement, payroll management and commitment control;
  • External control and Audit.

 

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